| Going commercial with properties |
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Singaporeans’ love affair with property means that many an investor has made property a component of their investment portfolio. However, the focus when investing in properties has been overwhelmingly on residential properties, especially super luxury developments in the central area, where investors seek to flip properties for spectacular gains, or high-end residential developments where investors look for rental returns. But as it turns out, commercial properties, which run the gamut from strata-titled office units, industrial property like warehouses and factories, and retail units in malls to shophouses, can be equally attractive investment choices if not more so. Capital values and rental yieldsIn terms of capital appreciation, director for research and consultancy at Colliers International, Ms Tay Huey Ying, said that there is generally no distinct difference in capital value growth potential for residential and commercial properties. Based on the Urban Redevelopment Authority’s price index in the current bull run, the values of offices in the central region had appreciated by 64.7 per cent between the first quarter of 2004 and the fourth quarter of 2007, just marginally lower than the 66.5 per cent seen for residential properties in the central region for the similar time period. Jones Lang LaSalle’s head of research for South East Asia, Dr Chua Yang Liang, took a more measured view: “On the average, residential property experience higher capital appreciation, as there are less transactions for commercial properties, meaning that prices go up in a more measure way.”
“Typically, prime commercial properties would enjoy higher rental yields than prime residential properties, comparing properties with similar tenure,” Ms Tay pointed out.
Source: Colliers International
Dr Chua likewise said that income yield can be better for commercial property. He estimates that in normal circumstances, residential property yields 3 to 4 per cent per annum compared to commercial property such as office units in prime areas which yield 4 to 4.5 per cent, industrial property which give returns of 7 to 7.5 per cent and retail units which yield 6 to 6.5 per cent.
Urban or suburban?In terms of choosing the location of your property, according to Ms Tay, the rule of thumb of “higher risks, higher returns” applies to property investments as well. “Commercial properties in prime locations are typically in greater demand than those in suburban location and are often demanded by companies in higher-margin industries. As such, they can be expected to generate a more steady stream of rental income. Hence, they would generally be deemed as a safer investment and therefore would be expected to generate slightly lower yields,” she said.
Ms Tay explained that on the other hand, suburban commercial properties can be expected to face greater risks such as default risk and vacancy risk. Hence, a higher yield would generally be expected of them compared to office space in the central business district (CBD) with similar quality.
Yields aside, Dr Chua pointed out that commercial property in different areas face different types of risks: “Retail units, especially in the town areas, are more sensitive to consumer demand and susceptible to tourist behaviour. Offices in the town areas are affected by global economic demand, while commercial property in the suburban areas rely more on local demand,” he noted.
Balancing the property portfolioWhen it comes to investing in property, retail investors have the choice of Real Estate Investment Trusts (REITs), equities in property companies, or direct investment in residential or commercial property. While commercial property may seem like an attractive investment choice, putting all your eggs in one basket is never a good idea, and it means sense to diversify your property investment through different instruments.
“A REIT is made up of a portfolio of properties and hence property investment risks can be minimized via geographical diversification or other forms of property diversification whereas in direct investment of real estate, property investment risks are concentrated in one single property. As such, all else being equal, investing in REITs would carry less risk than investing directly in a single real estate,” noted Ms Tay.
On top of the risks, Ms Michele Lee, investment specialist at Providend, an independent private wealth and investment manager, cautioned that liquidity is poorer in commercial property, as it is much easier to buy or sell REITS and other property securities. Furthermore, there is the issue of returns: “REITS tend to pay out 90 per cent of their income and you can count on stable dividends and even rise in share prices. REITs can also give good returns of between 4 to 9 per cent. For direct investment in property, your returns depend on what you manage to negotiate with the tenant and where the property is located,” she added. She advocated diversified allocation of investment monies into REITs and other property securities, residential and commercial property in order to spread out risks and get better returns.
All in all, investing in commercial property appears to be a good investment choice for the property component of an investment portfolio, with healthy yields and good likelihood of capital appreciation. But as the experts’ advice, it always makes sense to hedge your risks by putting your money in other classes of property investments as well.
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